EXCHANGE FEDERATION ADVOCATES CENTRAL OTC DERIVATIVES CLEARING, URGES RESTRAINT IN REGULATING SHORT-SELLING

Posted June 11, 2009

TEL AVIV – International regulators must work toward greater coordination and cooperation as countries reform and restructure oversight of their financial markets, institutions and products, states William J. Brodsky, Chairman of the World Federation of Exchanges (WFE), speaking at the annual conference of the International Organization of Securities Commissions (IOSCO).

“The current crisis has underscored the time-tested benefits of regulated exchanges; WFE’s collective experience is an especially valuable resource at this critical juncture in the evolution of our global markets,” says Brodsky, who is also Chairman and CEO of the Chicago Board Options Exchange (CBOE). “WFE remains committed to sharing its front-line experience with international regulators and governing bodies.”

The WFE Chairman outlined WFE’s positions on three critical regulatory issues under discussion by IOSCO participants: short selling, circuit breakers and clearing of over-the-counter (OTC) derivatives.

“We cannot meaningfully address the issue of rebuilding investor confidence with simplistic political remedies to complex market issues,” says Brodsky.  “Our common goal should be to curb abusive practices without undermining the benefits of legitimate short selling.”

On the issue of circuit breakers, he urged regulators to avoid “ad hoc trading halts” of markets, such as those which were imposed in some countries in 2008, and to work to “clarify the use of circuit breakers in volatile markets. It is important to ensure that circuit breakers are pre-determined, predictable and temporary so that customers can have clear expectations as to when they will occur and when they will be lifted.”

Lastly, OTC derivatives products must be standardized and cleared through central clearing parties to minimize systemic risk, according to Brodsky. “Perhaps less understood is that a key aspect of centralized clearing is the setting of appropriate margins – OTC products must be marked to market in an objective and appropriate way in order to be effectively margined,” he says. “Exchange trading of products that are complementary to OTC products can facilitate or ameliorate the formation of a more liquid market price. By providing the means for greater participation in similar products, exchange-based markets help reduce systemic risk.”